Newsletter | Volume 1

The Japanese tea ceremony ritual is often familiar when a top corporate executive bows and admits to his company’s wrongdoings. However, the recent Japanese corporate scandals go much further. The Chairman and or the CEO resigns, fires a scapegoat or sometimes even commits harakiri. In the past few years, several large Japanese corporations – from cosmetics maker Kanebo to brokerage Nikko Cordial, and machinery giant IHI to optical equipment manufacturer Olympus, they all admitted to fraudulent accounting or profit manipulation. Currently one of the biggest Japanese corporate names – Toshiba, is in the firing line.

There are several indicative Governance, Risk Management and Compliance similarities between the 142-year-old conglomerate Toshiba case (2015) and the Olympus scandal in 2011. The fraudulent accounts were a legacy of previous management teams – decades in the case of Olympus ($1.7 billion accounting fraud), several years for Toshiba’s – and both were brought to light by whistleblowers leaking data.

The problem with Toshiba was that of setting unrealistic goals for business units since 2009. Senior managers were ‘forced to’ manipulate and massage the revenues to meet their targets. Later billions of dollars were lost from Toshiba’s Westinghouse Electric nuclear business in the USA.

The result was that accounting malpractices overstated the profits by nearly $2 billion over the past seven years so that the company must restate its earnings for the last six fiscal years. Employees were pressured into inappropriate accounting by postponing loss reports or deferring costs.

An independent review is often a reasonable strategy
Toshiba had responded to the scandal by changing the top management, replacing chief executive and president who as president promised to do the following;

Address the social responsibility of alarming and causing trouble to 400,000 shareholders, devote wholeheartedly to regain your trust and revive under the new management.
Toshiba had a corporate culture in which management decisions could not be challenged
Implement appropriate corporate governance, to regain the market's trust
Many employees will face criminal charges, and the company will face official sanctions
Seek additional financial support from banks, by selling off its prized memory chip unit, offering stock holdings and real estate as collateral to lenders.
Japan's Finance Minister called the accounting irregularities "very regrettable" and a blow to the country's efforts to regain the confidence of global investors.

Toshiba will also appoint a slew of independent directors to its board to strengthen external oversight of its management and reserve over half of its board seats for outside appointees. Toshiba’s action plan to correct the past accounting irregularities, for correction will be identified by an independent investigation committee and then audited by Ernst & Young ShinNihon LLC — the very auditor under whose watch the irregularities occurred.

Toshibas latest delayed disclosure that had missed two previous deadlines for third quarter 2016 results are sent without the auditor approval to avoid further oversight issues. The revenues continue to decline with operating loss of 576 billion yen (5,2 busd) with a negative equity of approx. Three busd. The big question is whether the company can release an audited 2016 full-year statement in time.

A “mulligan” to get it right the second time
The improper accounting practice dating back to 2008 was probably intentional, and therefore it would have been difficult for Toshiba auditor Ernst & Young ShinNihon LLC to detect the massive fraud. It can be hard for the stakeholders to understand the nature of the accounting difficulties, given the sheer size of the audited misstatement.

A clear eyes review can provide an independent set of judgements on the circumstances that led to the accounting inaccuracies. A self-governing verification of the accuracy of the restated amounts makes little sense. Therefore an independent look would help restore confidence in Toshiba’s financial results and possibly identify further improvements to the accounting and audit process.

Copenhagen Compliance Thought Leadership write-up on a similar scandal related to Olympus. https://www.copenhagencompliance.com/news/EthicalCulture.php

At the 11th annual European GRC and IT Security Summit in London, we will review some recent cases, scandals and fraud components with key notes on Governance issues.